In our last lesson we wrapped up our discussion on the different order types available to forex traders with a look at the Entry order. In today’s lesson we are going to continue our discussion on the logistics of forex with a look at something which is known as rollover.
What you are actually trading in the forex market is a contract which requires one currency to be exchanged for another and delivered in two business days. For example, if I buy 1 contract of EUR/JPY then I am buying 100,000 worth of Euros and selling the equivalent amount of Japanese Yen. This technically requires me to deliver the equivalent amount of Japanese Yen portion of the trade to the bank account of the party I am trading with. The party that I am trading with is then technically required to deliver the 100,000 EUR portion of the trade to my bank account in two business days.
As we are trading simply for speculation however, we do not want actual physical delivery of the currency, so the platform which we are using in our examples, and pretty much any other retail forex trading platform, will automatically role this position over to the next delivery date if the position is held past 5pm Eastern Standard Time.
It is not really important to understand all the details here as this part is done automatically. What it is important to understand however is that there is a US Dollar debit or credit made to your account for any position held past 5pm Eastern Time, to account for the interest portion of the transaction.
As with most other transactions which involve holding or borrowing money, trading currencies also involves an interest payment or credit depending on whether you are the holder of a currency or the borrower of a currency.
What this means is that if I buy USD/JPY which means I have bought US Dollars and sold Japanese Yen, then I earn interest on the US Dollars I have bought and pay interest on the Japanese Yen that I have sold in order to buy those US Dollars. The reason for this is technically what I am doing when I sell a currency, is borrowing that currency and then exchanging the borrowed currency for the equivalent amount of the currency that I am buying.
I am oversimplifying things a bit here but basically the interest rates that you pay and receive on the currencies involved in the trade, is two days worth of interest derived from the overnight interest rates of the countries whose currencies you are trading.
If you remember from module 8 of our basics of trading course in the free course section of InformedTrades.com, overnight interest rates in the United States for US Dollars are set by the Federal Reserve. Just as the United States has the Federal Reserve, other countries around the world also have central banks which set the overnight rates for their currencies.
When trading forex if you buy the currency with the higher interest rate and sell the currency with the lower interest rate, then you earn money for holding a trade past 5pm when rollover occurs, because the interest rate differential is in your favor. Conversely if you sell the currency with the higher interest rate and buy the currency with the lower interest rate then you pay interest if you hold the trade past 5pm, because the interest rate differential is not in your favor. If you open and close the position before 5pm then nothing happens as there is no rollovernecessary.
As noted above we are trading a 2 day contract in the forex market, so the interest that you either pay or receive at rollover is 2 days worth of interest, calculated based on the interest rates as set by the central banks in the countries of the currency pairs which you are trading.
Using our USD/JPY trade as an example, overnight interest rates in the United States are at 2.25% as of this lesson, and rates in Japan are at .5%.
As you can see here when we are trading the USD/JPY currency pair, if we buy then we are long (holding) US Dollars at an interest rate of 2.25% and we are short (borrowed) Japanese Yen at an interest rate of .5%. So in this example the interest rate differential is in our favor by 1.75%, so we will earn interest if we hold this position past 5pm NY Time.
If we were to sell the USD/JPY then we are short (borrowing) US Dollars at an interest rate of 2.25% and long (holding) JPY at an interest rate of .5%. So in this case the interest rate differential is against us by 1.75% so we will pay interest if we hold this position past 5pm NY Time.
I have tried to make this as simple as possible but to be upfront this is probably the most difficult concept for traders who are new to the forex
Thats our lesson for today. In tomorrow's lesson we are going to continue our rollover discussion with a look at where you go to find out whether you are going to pay or receive money for holding positions past rollover and the basics of how traders leverage this rollover concept to their advantage so we hope to see you in that lesson.
As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading! market to grasp, so if it takes a little bit of time don't worry you are not alone.
Elevate Your Trading With The Amazing Trader!
The Amazing Trader includes:
Actionable trading levels delivered to YOUR charts in real-time.
Live trading strategy sessions.
Market Updates with Trading Tools.
Sign Up now for a free Trial now using the form below:
All Day flash Mfg PMIs 25-Oct Tue
08:00 DE- IFO
14:00 US- CB Consumer Confidence 26-Oct Wed
All Day flash SVC PMI
00:30 AU- CPI
14:00 US- New Homes Sales
14:00 US- Pending Homes Sales
14:30 US- EIA Crude 27-Oct Thu
08:30 GB- GDP
12:30 US- Weekly Jobs
12:30 US- Durable Goods
23:30 JP- CPI 28-Oct Fri
12:30 US- GDP
14:00 US- University of Michigan 30-Oct Sun
00:00 RZ/GB Clocks turn back one hour
Today has a light data calendar with only key Canadian CPI and Retail Sales data slated.
As expected, the highlight of trade this week has been the Thursday ECB policy board meeting outcome. While the ECB statement included no surprises, markets took the Draghi comments to be dovish. The ECB used its standard rhetoric and said no decision on a "taper" would be announced until the December meeting. Markets reacted by taking out stops above and below the markets in EURUSD.
UK Retail Sales data Thursday were lacklustre, while Australian Employment data for September were weaker than expected.
U.S. Bond yields remain depressed following mixed September CPI data and recent Fed comments. Both the Fed and BOE have started to make it clear that they would ignore an inflation overshoot to get their economies growing again.
looking for your first broker or do you need of a new one? There are
more critical things to consider than you might have thought.
We were trading long before there were online brokers. Global-View
has been directly involved with the industry since its infancy. We've
seen everything and are up-to-data with recent regulatory changes.
The Global-View Forex Forum is the hub for currency trading on the web. Founded in 1996, it was the original forex forum and is still the place where forex traders around the globe come 24/7 looking for currency trading ideas, breaking forex news, fx trading rumors, fx flows and more. This is where you can find a full suite of forex trading tools, including a complete fx database, forex chart points, live currency rates, and live fx charts. In addition, there is a forex brokers directory where you can compare forex brokers. There is also a forex brokers hotline where you can ask for help choosing a forex broker that meets your individual fx trading needs. Interact on the same venue to discuss forex trading.
The forex forum is where traders come to discuss the forex market. It is one of the few places where forex traders of all levels of experience, from novice to professionals, interact on the same venue to discuss forex trading. There is also the GVI Forex, which is a private subscription service where professional and experienced currency traders meet in a private forex forum. it is like a virtual forex trading room. This is open to forex traders of all levels of experience to view but only experienced currency tradingprofessionals can post.
Currency trading charts are updated daily using the forex trading ranges posted in the Global-View forex database. You will also find technical indicators on the fx trading charts, e.g. moving averages for currencies such as the EURUSD. This is another forex trading tool provided by Global-View.com.
The forex database can be used to access high, low, close daily forex ranges for key currency pairs, such as the EURUSD, USDJPY, USDCHF, GBPUSD, USDCAD, AUD, NZD and major crosses, including EURJPY, EURGBP, EURCHF, GBPJPY, GBPCHF and CHFJPY. Data for these currency trading pairs dating back to January 1, 1999 can be downloaded to an Excel spreadsheet.
Forex chart points are in a currency trading table that includes; latest fx tradinghigh-low-close range, Bollinger Bands, Fibonacci retracement levels, daily forex pivot points support and resistance levels, average daily forex range, MACD for the different currency trading pairs. You can look on the forex forum for updates when one of the fx trading tools is updated.
Global-View also offers a full fx trading chart gallery that includes fx pairs, such as the EURUSD, commodities, stocks and bonds. In a fx trading world where markets are integrated, the chart gallery is a valuable trading tool. Look for updates on the Forex Forum when the chart gallery is updated.
Global-View.com also offers a forex blog, where articles of interest for currency trading are posted throughout the day. The forex blog articles come from outside sources, including forex brokers research as well as from the professionals at Global-View.com. This forex blog includes the Daily Forex View, Market Chatter and technical forex blog updates. In additional to its real time forex forum, there are also Member Forums available for more in depth forex trading discussions.
WARNING: FOREIGN EXCHANGE TRADING AND INVESTMENT IN DERIVATIVES
CAN BE VERY SPECULATIVE AND MAY RESULT IN LOSSES AS WELL AS PROFITS. FOREIGN
EXCHANGE AND DERIVATIVES TRADING IS NOT SUITABLE FOR MANY MEMBERS OF THE
PUBLIC AND ONLY RISK CAPITAL SHOULD BE APPLIED. THE WEBSITE DOES NOT TAKE
INTO ACCOUNT SPECIAL INVESTMENT GOALS, THE FINANCIAL SITUATION OR SPECIFIC
REQUIREMENTS OF INDIVIDUAL USERS. YOU SHOULD CAREFULLY CONSIDER YOUR FINANCIAL
SITUATION AND CONSULT YOUR FINANCIAL ADVISORS AS TO THE SUITABILITY TO YOUR
SITUATION PRIOR TO MAKING ANY INVESTMENT OR ENTERING INTO ANY TRANSACTIONS.